Demand for lithium is soaring on the back of rapidly growing sales for electric vehicles (EVs) and a burgeoning energy storage industry. Lithium-ion batteries have long been used in consumer electronics, but EVs use 4,800 times the lithium of a smartphone, promising to put a strain on supplies as electrification becomes more popular.
In a sign that the EV market is starting to pick up steam, the U.S. just had its best quarter on record with 49,000 EVs sold, a 7 percent increase from the third quarter and a whopping 45.7 percent increase from the same quarter in 2015.
Still, EVs only make up less than 1 percent of the U.S. auto sales, and carving out a sizable foothold in the market will take time. By 2040, the IEA projects that EVs will still only capture 10 percent of annual auto sales.
The ramp-up of battery production, combined with the rollout of a growing number of new EV models, ensures strong demand for lithium in the years ahead.
Nevertheless, the market is growing quickly. In early January 2017, Tesla began operations at its gargantuan gigafactory, where it began mass production of lithium-ion batteries for its EVs and for its new Powerwall 2 and Powerpack 2, a line of residential, commercial and utility-scale energy storage systems. The ramp-up of battery production, combined with the rollout of a growing number of new EV models, ensures strong demand for lithium in the years ahead.
Lithium will, in the next decade, see the fastest growth rate out of any major commodity over the past century.
Lithium demand is set to rise by 16 percent per year over the course of the next decade, quadrupling by 2025 to 750,000 tons, according to Morningstar. That is the fastest growth rate out of any major commodity over the past century.
The Tesla gigafactory has the potential to dramatically accelerate lithium demand. By mid-2018 when the gigafactory hits peak production, the 35 gigawatt-hours of annual battery production capacity will be nearly equivalent to the volume of batteries that the rest of the world produces combined.
A 2016 report from Navigant Research projects sales for lithium-ion batteries just for passenger vehicles to total $221 billion between 2015 and 2024. “The demand in vehicles, electric bikes, trucks and buses is going to be enormous, and the electric storage market is also going to be significant,” Neil Biddle, executive director of Perth-based Pilbara Minerals, told Bloomberg last year.
Tesla is aiming for sales of 500,000 Model 3 vehicles in 2018, an ambitious objective given that the company fell short of its 80,000-vehicle target in 2016. Still, if the company comes even remotely close to that heady sales figure, battery demand–and thus lithium demand–will continue to soar. More importantly, Tesla is not the only EV player these days. There are roughly 33 vehicle models that are either pure electric or a combination of electric and gasoline. But that number is surely to grow: Ford alone is set to unveil 13 new fully-electric and electric-hybrid vehicles by 2020.
A feedback loop effect promises to accelerate adoption. More demand for EVs and energy storage systems will lower the cost of batteries, making them even more attractive. Bloomberg New Energy Finance predicts that battery prices will fall by an additional 15 percent in 2017, after falling by 70 percent in the preceding five years.
Unlike the IEA, BNEF envisions a scenario in which EVs account for 35 percent of the global auto market by 2040, or about 90 times larger than the EV share in 2015.
Lithium supply constrained
Even as demand will remain reliably brisk for years to come, lithium supply is inelastic in the short run. Bringing new lithium mines online will take time, but in the interim the market will tighten. By 2025, the supply of lithium could fall short of demand by about 100,000 tons.
But the world is not necessarily deficient in lithium reserves. Lithium can come from hard rock mining or from evaporating brine in salt flats. Lithium from brine tends to be cheaper and less challenging to produce, and some of the best lithium deposits are in the salt flats of Chile, Bolivia and Argentina. China, Australia and North America are also home to abundant lithium reserves.
With demand suddenly hot and prices on the rise, new mining companies are jumping into the fold.
With demand suddenly hot and prices on the rise, new mining companies are jumping into the fold. Until recently, global lithium supplies have been under the control of a quasi-oligopoly, with market share highly concentrated in the hands of a just a few companies, namely, SQM, Albemarle, FMC and Tianqi. But scrappy upstarts are multiplying across the lithium space, hoping to capitalize on rising prices. Companies like American Lithium, Pure Energy Minerals and Nevada Energy Minerals are just a few on a growing list of junior mining companies cropping up in Nevada’s Clayton Valley, which is home to lithium reserves and also happens to be situated near Tesla’s gigafactory. Tesla even signed a deal with Pure Energy Minerals for lithium supply, provided that the junior company can produce lithium economically.
But producing lithium is a costly and lengthy process. Lithium carbonate prices, as a result, should continue on their upward trajectory in the near-term, having already tripled since 2014 and rising by 60 percent in last year alone. Even as other commodities suffered over the past few years, lithium was a lone bright spot for investors.
Lithium market tightens, but not enough to stop electrification
Lithium only accounts for about 10 percent of the cost of batteries, so even a doubling of lithium prices would only increase battery costs by 10 percent.
Lithium is actually quite plentiful around the world, so prices will eventually retreat as mines proliferate. But in the short run, supply could struggle to keep up with demand. In addition, a tightening lithium market is unlikely to kill off demand. Navigant Research estimates that lithium only accounts for about 10 percent of the cost of batteries, so even a doubling of lithium prices would only increase battery costs by 10 percent. Falling battery prices because of economies of scale, automation and standardization will more than offset any increases in lithium prices. The debate surrounding the ultimate growth rate for EVs in the years ahead is heated, but the pace of EV adoption will not likely be dramatically affected by a tighter market for lithium.